A federal appeals court dealt a potentially major blow to President Obama’s health care law Tuesday, ruling that participants in health exchanges run by the federal government in 34 states are not eligible for tax subsidies.

Richard Wolf, Detroit Free Press, Jul 22, 2014

The 2-1 ruling by a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit, which is sure to be appealed by the government, threatens the framework of the health care system for about 5 million Americans without employer-provided health plans.

The case, filed by a coalition of states, employers and individuals, had been considered a long shot effort to derail the Affordable Care Act, also known as Obamacare. Federal district judges in the District of Columbia and Virginia previously had ruled for the government. Three similar cases remain pending.

The appeals panel ruled that, as written, the health care law allows tax credits to be offered to qualified participants only in state-run exchanges. The administration had expected most if not all states to create their own, but only 16 states did so.

The court said the Internal Revenue Service went too far in allowing participants in other states served by the federal exchange to qualify for billions of dollars in government assistance. The aid has helped boost enrollment figures to more than 8 million.

In Michigan, 237,337 consumers, or 87% of those who signed up for plans on the Michigan Health Insurance Marketplace, received tax credits that helped reduce costs for premiums or out-of-pocket expenses, according to a report released in May by the Obama administration.

“We reach this conclusion, frankly, with reluctance,” the panel majority said. “At least until states that wish to can set up exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal exchanges and for health insurance markets more broadly.”

If allowed to stand, the ruling would blow a major hole in the law, since tax credits or subsidies are what make the private health insurance policies offered on the exchanges affordable to most Americans without employer-sponsored insurance plans.

If the subsidies are invalidated in 34 states, then many of the tax penalties imposed on employers and individuals for non-compliance with the law also would be eliminated. Employers pay a penalty when their workers get subsidized on the exchange. Individuals get penalized if they don’t buy affordable insurance, but the subsidies often are what make it affordable.

Michael Cannon, a Cato Institute health economist who helped devise the legal challenge, said the refusal by so many states to create health exchanges led to the court ruling. “This is popular resistance to the law,” he said.

Although the ruling will have no impact while it is appealed -- either to the full appeals court, which includes four Obama appointees, or to the Supreme Court -- the result could be chaotic if ultimately allowed to apply nationwide.